The Pig Butchering Scam!
Summary
TLDRThe 'Pig Butchering' scam, prevalent during the COVID-19 pandemic, lures victims into online relationships, then entices them into cryptocurrency investments through fake trading apps. Scammers, often themselves victims of human trafficking, manipulate targets to invest substantial amounts, only to vanish with the funds. The scam has evolved with the use of AI and sophisticated tactics, leading to significant financial losses and even impacting the banking system. The video also discusses the role of Tether and Tron in facilitating these scams and the challenges faced by law enforcement in tracking and stopping these illicit activities.
Takeaways
- 📨 The Pig Butchering scam initiates with seemingly ordinary messages from strangers, often on social media or dating sites, aiming to establish trust and friendship.
- 💡 Scammers lure victims into online relationships, portraying themselves as wealthy due to cryptocurrency trading, exploiting the allure of quick riches during periods of boredom, such as the COVID-19 pandemic.
- 🎯 The scam differs from the 'Nigerian Prince' scam in its methodical development of a relationship before introducing the cryptocurrency investment angle.
- 🕵️♂️ The detailed example of Zeke Faux's interaction with a scammer illustrates the patience and tactics used to entice victims into investing in fake cryptocurrency exchanges.
- 💔 The scam's impact is far-reaching and financially devastating, with victims ranging from individuals to institutional figures like a bank CEO, leading to significant financial losses and even bank failures.
- 🐷 The term 'Pig Butchering' reflects the scammer's method of 'fattening' the victim with false hopes before 'slaughtering' them financially.
- 🌍 The scam's operations have been traced to specific locations in Southeast Asia, where workers are often trafficked and forced to run these scams under duress.
- 🛡️ DeleteMe, the video's sponsor, offers a service to protect personal information from being exploited by scammers by removing data from data brokers.
- 📈 The scam involves fake trading apps that mimic the appearance and functionality of legitimate platforms, tricking victims into believing their investments are growing.
- 🕊️ Scammers use AI and other technologies to create convincing profiles and even fake video calls, furthering their deceit.
- 📉 The Chinese government's crackdown on crypto fraud has pushed these operations offshore, where they have adapted and expanded, targeting a broader range of victims.
Q & A
What is the 'Pig Butchering' scam?
-The 'Pig Butchering' scam is a type of online fraud where victims are befriended, often through social media or dating sites, and then lured into a false sense of security before being manipulated into investing in cryptocurrencies, which ultimately leads to significant financial loss.
How did the 'Pig Butchering' scam originate and how did it evolve?
-The scam originated in China and initially targeted Chinese citizens. After Beijing imposed a ban on cryptocurrency investments in 2022, the scammers shifted their focus to ethnic Chinese women living abroad and eventually targeted anyone who would respond to their messages.
What is the connection between the 'Pig Butchering' scam and cryptocurrency?
-The scam heavily relies on cryptocurrency as the medium for investment, using it to create a sense of legitimacy and to facilitate the transfer of funds. The scammers often use stablecoins like Tether, which are pegged to the US dollar, to convince victims of the safety of their investments.
Why was the 'Pig Butchering' scam more successful during the COVID-19 pandemic?
-The pandemic provided the perfect conditions for scammers to prey on lonely individuals who were stuck at home and looking for connections online. The travel restrictions also provided a plausible excuse for why the scammers could not meet their victims in person.
How do scammers in the 'Pig Butchering' scam manipulate their victims?
-Scammers build a relationship with the victim, often over an extended period, to gain their trust. They use a combination of flattery, shared interests, and the promise of wealth through cryptocurrency investments to manipulate the victim into parting with their money.
What is the role of fake trading apps in the 'Pig Butchering' scam?
-Fake trading apps are used to simulate the appearance of legitimate trading platforms. They are designed to give victims a false sense of confidence by showing fabricated trades and profits, encouraging them to invest more money.
How do scammers use AI in the 'Pig Butchering' scam?
-Scammers use AI to generate profile photos or heavily photoshop images to avoid detection. They may also use AI software for video calls to impersonate the person they are scamming, and in some cases, claim their camera is broken to avoid video and only do voice calls.
What is the scale of the 'Pig Butchering' scam in terms of financial loss?
-According to the script, investigators estimate that at least $10 billion has been lost to crypto romance scams like 'Pig Butchering'. There have been cases where individuals have lost millions of dollars, and even a bank CEO ended up in prison after losing $50 million of the bank's money.
How does the 'Pig Butchering' scam relate to human trafficking?
-The scam is connected to human trafficking as some scammers are themselves victims, lured from various parts of Southeast Asia with promises of high-paying jobs, only to be held captive, have their passports confiscated, and be forced to run these scams.
What measures can individuals take to protect themselves from the 'Pig Butchering' scam?
-Individuals should be cautious of unsolicited messages from strangers, especially if they involve investment opportunities. They should verify the legitimacy of any investment platform and be wary of anyone pressuring them to invest in cryptocurrencies.
What is the role of DeleteMe in the context of this video script?
-DeleteMe is the sponsor of the video. It is a subscription service that helps individuals remove their personal information from data brokers, which can be used by online scam artists to target potential victims.
Outlines
📨 The Pig Butchering Scam: Initial Contact and Trust Building
The Pig Butchering scam initiates with seemingly ordinary messages from unrecognized individuals across various platforms, including text messages, social media, and dating sites. The unsuspecting recipients might ignore these messages, but those who respond are drawn into an online relationship with an attractive stranger who eventually reveals their wealth, attributed to cryptocurrency trading. This scam gained traction during the COVID-19 pandemic when people were more likely to entertain online interactions. Unlike the Nigerian Prince scam, Pig Butchering involves significant time and effort in cultivating a relationship before any financial aspect is introduced. The narrative includes an investigative reporter's experience with a scammer who built trust over time, only to disappear once the reporter's true identity was revealed. The scam's name is derived from a farming practice, and the scammers refer to themselves as 'dogs,' highlighting the dehumanizing nature of the operation.
🏭 The Dark Reality of Forced Labor Behind the Scam
The script delves into the grim reality behind the Pig Butchering scam, revealing a network of captive workers in Southeast Asia, lured by false job promises and held against their will. These individuals, who had their passports confiscated, are forced to operate the scams, with local law enforcement either complicit or powerless to help. The video also introduces a sponsor, DeleteMe, a service that helps individuals remove their personal information from data brokers, which is often exploited by scammers. The Pig Butchering scam follows a pattern of befriending victims and instructing them to buy crypto stablecoins before transferring funds to fraudulent trading apps. These apps are designed to mimic legitimate platforms, complete with features like two-factor authentication, to instill a false sense of security in the victims.
💼 The Financial Impact and Emotional Manipulation Tactics
The narrative explains how victims of the Pig Butchering scam can initially withdraw small amounts of money to build trust, but once they've invested larger sums, they find themselves unable to withdraw funds. The scammers manipulate the victims into wiring additional money for fabricated reasons, like taxes, further exploiting them financially. The scam's impact is far-reaching, with victims often too embarrassed to report the crime. The scam initially targeted Chinese citizens but later shifted focus to ethnic Chinese living abroad and eventually anyone responsive to their messages. The Chinese government's crackdown on crypto frauds and the subsequent offshore movement of criminal gangs are discussed, along with the pandemic's role in facilitating the scam's growth.
🌐 Cryptocurrency's Role in Facilitating and Concealing Illicit Funds
The script discusses the use of cryptocurrencies, particularly Tether and the Tron blockchain, by scammers for their price stability and low transaction fees. It details how the scammers leverage these technologies to extract payments from victims and the families of trafficked workers. The difficulty of tracing cryptocurrency transactions due to their quasi-anonymous nature is highlighted, along with the challenges faced by law enforcement in investigating such crimes. The narrative also includes a case of a Kansas bank CEO who lost millions to the scam, leading to the bank's collapse and significant financial repercussions.
📚 Scammers' Psychological Manipulation and the Impact on Victims
This section of the script describes the psychological tactics used by scammers, as outlined in leaked handbooks, to manipulate their victims. Scammers are instructed to create attractive, educated, and seemingly wealthy profiles, using strategies to appeal to the victims' dreams and goals. The handbook also suggests tricks to create a sense of wealth and success, and to gradually introduce the idea of cryptocurrency investment as a game. The darker side of these scams, involving blackmail using intimate photos, is also mentioned, with advice on how to handle such situations.
🔎 Tracking Illicit Cryptocurrency Flows and the Challenge for Regulators
The script presents a study by researchers from the University of Texas at Austin, which tracked the flow of illicit funds through cryptocurrency exchanges. The study identified patterns in the use of certain exchanges and the role of stablecoins like Tether in facilitating money laundering. It highlights the shift in victim demographics following China's ban on cryptocurrency and the subsequent increase in US-based victims. The researchers argue that the existing financial system is ill-equipped to deal with the anonymous nature of cryptocurrency transactions, and they suggest that more needs to be done by regulators and law enforcement to prevent the movement of illicit funds.
🛑 The Urgency for Regulatory Action Against Cryptocurrency-Enabled Crime
The final paragraph emphasizes the urgency for regulatory action to address the growing issue of cryptocurrency-enabled crime. It discusses the findings of the University of Texas study, which suggest that certain crypto exchanges are complicit in facilitating illegal activities. The narrative calls for better monitoring and protection of customers by these exchanges, as well as a coordinated international effort to track and disrupt criminal networks using cryptocurrencies. The paragraph concludes with a call to action for viewers to learn more about the issue and to support the video's sponsor, DeleteMe.
Mindmap
Keywords
💡Pig Butchering scam
💡Cryptocurrency
💡Stablecoin
💡Tether (USDT)
💡Crypto romance scams
💡Yuman Traffique King
💡Blockchain
💡Two-Factor Authentication (2FA)
💡DeFi (Decentralized Finance)
💡KYC (Know Your Customer)
💡Anti-Money Laundering (AML)
Highlights
The Pig Butchering scam starts with unsolicited messages from strangers, often on social media or dating sites, leading to a seemingly genuine relationship.
Victims are lured into online friendships or romances with individuals who claim wealth from cryptocurrency trading.
Pig Butchering differs from the Nigerian Prince scam in its focus on relationship building rather than immediate financial requests.
The scam flourished during the COVID-19 pandemic, capitalizing on people's isolation and interest in cryptocurrency success stories.
Scammers use sophisticated methods, including AI-generated profile photos and fake help desks, to mimic legitimate trading platforms.
Victims are encouraged to invest in cryptocurrencies, starting with small amounts to build trust before larger sums are requested.
Losses from Pig Butchering scams are substantial, with documented cases of individuals losing millions of dollars.
Scammers often target individuals with terminal illnesses or in vulnerable positions, exploiting their emotional states for financial gain.
Pig Butchering scams have led to significant financial losses for institutions, including the collapse of a bank due to the CEO's involvement.
Crypto romance scams like Pig Butchering have resulted in an estimated loss of at least $10 billion dollars.
Scammers are often victims of human trafficking themselves, working in forced labor conditions in foreign countries.
The scam's infrastructure has adapted to law enforcement efforts, moving operations offshore and using digital currencies to avoid detection.
Cryptocurrency's pseudo-anonymity and the lack of stringent KYC procedures on certain exchanges facilitate the laundering of illicit funds.
The Pig Butchering scam has evolved to target a broader demographic as law enforcement and regulatory actions have increased in China.
Scammers use psychological manipulation to exploit the dreams and aspirations of their victims, as outlined in leaked scammer handbooks.
Research by John Griffin and Kevin Mei from The University of Texas at Austin has identified patterns in cryptocurrency money flows used by scammers.
The study suggests that cryptocurrency exchanges, particularly those with lax KYC procedures, may be complicit in facilitating scams.
The research indicates that tracking cryptocurrency transactions is feasible and could be a tool for law enforcement to combat scams.
Transcripts
The Pig Butchering scam typically begins with a fairly ordinary message that arrives from
a person you don’t recognize, it might be a text message that looks like a wrong number,
or it might be a message that arrives on LinkedIn, Instagram or even an online dating
site. Sometimes it is even a scam comment under a YouTube video that you have been watching.
A lot of people receive these messages and ignore them, either suspecting a scam or
they just don’t feel like responding. Those who do reply find the (usually
attractive) stranger wants to befriend them. Eventually the victim is lured into an online
friendship or romance and learns that the person messaging them is quite
wealthy – later it comes out that it is due to their expertise trading cryptocurrencies.
The scam flourished during the covid years at a time when people were stuck at home bored, and it
didn’t seem so crazy to run into someone who had made a fortune trading crypto - after all the news
was filled with stories like that at the time. Pig butchering – as a scam - is quite different
to the Nigerian Prince scam, which everyone has heard of at this point,
as there is no obvious upfront pitch and lot of time spent developing a relationship.
In ‘Number Go Up’ by Zeke Faux – he described stringing along one of these scammers as part
of the research for his book on crypto fraud. The 32-year-old divorcee who started texting him,
chatted for a while and befriended him before she began to send him charts of
bitcoin returns demonstrating her trading skills. When he expressed curiosity, she told
him that he wasn’t ready to trade like her yet and recommended that he read some books on bitcoin and
investing first. She chatted away for days never asking him to send her any money. Eventually,
after he mentioned that he would love to someday buy an expensive car – she told him that if
she taught him how to trade the car would be affordable. She then sent him a link to a crypto
exchange suggesting that he open an account and she would tell him when to buy and sell
so that he could multiply his savings quickly. Once he opened an account, he had to fund it using
a stablecoin called tether which she explained was safe as it traded 1:1 with the US dollar.
He started with $100 dollars – which converted into 81 Tether – because – ya know – crypto
transaction costs… She explained that he really needed to fund the account with at
least $500 dollars to get going – she even called him up to help him fill out the online forms.
Zeke, unfortunately never got to multiply his savings and buy the car of his dreams,
as when he explained that he was an investigative reporter, she hung up, her online profile
disappeared, and he never heard from her again. A few of my viewers possibly think that Zeke was
wise to get his story and escape after only losing a hundred dollars, but who knows, maybe his FUD
prevented him from anteing up the $500 and getting the Cybertruck of his dreams. We will never know…
According to a BBC documentary on the topic, the scam is known as Pig Butchering after the practice
of farmers fattening hogs before slaughter. According to the BBC, the scammers call
themselves dogs. The BBC then seem to have given them dog masks to wear while being interviewed.
In my opinion they missed the chance of asking if there is anything else that people call them,
and getting them to wear much funnier masks, but maybe that’s why the BBC would never hire me…
Eh Patrick – the people in HR want to chat with you about the
origami masks that you have been making… Anyhow, the BBC documentary showed how a
Boston Lawyer with terminal cancer was scammed out of two and a half million dollars. Even worse,
a Kansas Bank CEO recently ended up in prison after he lost 50 million dollars of the bank’s
money to a pig butchering scam. The losses caused the bank to fail last summer. The
size of the losses in these scams is huge. An investigator at a crypto-tracking firm
told Zeke that at least $10 billion dollars has been lost to crypto romance scams like these.
The most shocking part of Zekes story, which he discussed with me on this channel a few months
ago is that he later learned that whoever was posing as Vicky was most likely themselves a
victim of Yuman Traffique King. Later as part of his research, Zeke travelled to a small
casino town in southeastern Cambodia where these messages can be traced to and visited a compound
of heavily guarded buildings, where one of the guards told his guide that the buildings were
rented to Chinese companies and the workers inside couldn’t leave. He was told it was
useless to report forced labor to the local law enforcement who had been paid off as rather than
aiding the victims, the local law enforcement would detain them for immigration violations,
possibly returning them to their captors. The workers trapped inside these buildings were
allegedly young people who had been lured from all over Southeast Asia with the promise of highly
paid jobs. They had their passports confiscated and were held captive, forced to run these scams.
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The pig butchering scam generally follows a fixed pattern of befriending the victim before
instructing them to buy crypto stablecoins on well-known crypto exchanges before then getting
them to transfer the funds to fake trading apps that look and sound legitimate to crypto newbies.
The fake trading apps are set up to have the look, the detail and the functionality of a real
trading app and some scammers even use legitimate software that allows anyone to build a trading
platform - as some of these software companies license their software to foreign exchange brokers
who provide it as a front end to their clients. According to ForexFraud.com scammers use clones
of well-known trading apps which are modified to simulate transactions to make it look like
real trades are happening and money is being made – in the real world, no actual trades are
happening. Seeing this gives the victims a false sense of confidence and helps to encourage them to
add more money to their accounts or to even get their friends and family to open accounts too.
This scam can be more sophisticated than you might expect. Some of the scam brokers even
have fake help desks to field phone calls and they encourage the use of features like
two Factor authentication, giving victims the feeling that they are dealing with a
legitimate broker. Some of these trading apps are even downloaded from the big app stores,
and the scam victims check the reviews, see that the app is highly rated, and everything seems OK.
The scammers are known to use AI generated profile photos, or heavily photoshopped images so that a
google reverse image search won’t give them away. They occasionally even use AI software so that
they can do video calls with the scam victims. In other cases they claim that the selfie camera
on their phone is damaged so that they can only do voice calls. The Boston lawyer with terminal
cancer who was ripped off was being sent photos lifted from a Korean models Instagram account, and
had multiple phone calls with the scammer. [Clip] Before ripping off their victims, the scammers
slowly build up a profile of the persons finances through the online relationship,
asking questions about their income, the type of car they own, their lifestyle and the assets they
might own, like a home. They also encourage roping in friends and family members by
promoting flash coin sales and special deals. When the accounts are small, the scam victims
can often withdraw some of their money. This tricks them into trusting the online platform,
but once they have deposited a lot of money, they find themselves no longer able to withdraw. Often
the way it works is that they are told that they need to wire in additional money to pay
a tax before withdrawing their funds. This can squeeze the last bit of money out of them. Their
online romantic guide tells them that this is totally standard, and if they can’t come up
with the money will encourage them to borrow it from friends and family to pay the tax. Shortly
afterwards the brokerage firm disappears, the beautiful stranger disappears, and the victim
realizes that their money is gone. Often victims are so embarrassed that they don’t even report the
crime to law enforcement because of the shame. According to an FT article, Pig Butchering
scammers initially preyed on Chinese citizens, but later focused on ethnic
Chinese women living abroad after Beijing imposed a domestic ban on cryptocurrency
investments in early 2022. At this point they target anyone who will respond to their messages.
While it might seem funny to string the scammers along and waste their time,
these claptive workers are often between if they don’t bring in enough money.
The Chinese government began its crack down on crypto frauds in 2017,
eventually outlawing cryptocurrencies altogether. When this scam first appeared,
the Chinese police arrested gang members and warned citizens about how to avoid crypto fraud.
The severity of the crackdown in China forced the gangs offshore to south-east Asia, where they
began targeting victims outside of mainland China. The pandemic provided the perfect opportunity for
scammers to build relationships with lonely men and women who were stuck at home - and the travel
restrictions that had been put in place around the world provided the perfect excuse for why the
con artist could never meet up in person. News reports of booming crypto prices and unlikely
millionaires made the whole thing seem much more plausible back then than it does today.
When the scammers began to flee China in late 2017 and early 2018, many moved to a town in western
Cambodia, nicknamed the “Macau of south-east Asia”, where a fast growing casino industry
run by Chinese entrepreneurs already existed. The casinos were booming at the time and attracted
criminals, loan sharks and prostitutes. In 2018, the provincial governor warned
that Chinese investment had “created opportunities for the Chinese mafia” — including kidnapping,
resulting in “insecurity” for the region. Towards the end of 2019, Cambodia’s prime minister
effectively banned online gambling. The pandemic a few months later brought travel restrictions,
closing the remaining casinos and bringing a halt to the local construction boom. A lot of
the Chinese casino workers and construction workers returned home, and the criminal
gangs were forced to evolve. They turned the casino hotels and the newly abandoned office
and residential buildings into call centers for their new profit center - the pig butchering scam.
According to UN estimates, the Pig Butchering scam quickly grew to make up half of Cambodian GDP,
which meant there was a lot of money being made which could be
used to bribe local law enforcement. The scale of Yuman Traffique King that
occurred to staff these scam centers become such a big issue that Chinese authorities had to issue
travel warnings to Chinese citizens, warning them to be wary about accepting well paid jobs
in Cambodia due to the risk of being enslaved. In 2021, a joint Cambodian/Chinese police raid
busted a 200-person scamming complex in Phnom Penh where most of the imprisoned workers
turned out to be from China’s Yunnan province. An FT article from earlier this year describes
how analysis by the blockchain analytics firm Chainalysis and the anti-slavery
group “International Justice Mission” shows that a single compound in Myanmar
scammed over $100 million dollars from Pig Butchering victims in less than two years.
The investigators tracked digital coins issued by Tether being moved over the Tron blockchain
from Pig Butchering Victims to two digital wallets owned by a Chinese company. They
showed that Tether tokens and the Tron blockchain had also been used to extract
payments from the families of traffiqued workers who were paying grand sums for their release.
Chainalysis told the FT that they are seeing lots of scammers leverage Tether and Tron as
the price stability of Tether is attractive, combined with the low transaction fees for Tron.
A spokesman for The International Justice Mission told the journalist that “Everyone
has known for a long time that these scams were blockchain-based, but this was the first time
they had been able to tie the scamming to a specific location and a known compound”
In the book “Number Go Up,” a Taiwanese police officer told Zeke Faux that he
had been investigating Yuman Traffique King for quite some time and that crypto was now making his
work a lot more difficult. In the old days when criminals used traditional methods to move money,
banks would turn over the criminal’s information to authorities in order to remain in compliance
with the law. The police officer explained to Zeke that Tether doesn’t collect any information
on the holders of its coins, making these crimes extremely difficult to investigate.
In possibly the highest profile example of pig butchering, a Kansas bank called
Heartland Tri-State Bank failed this time last year after its CEO allegedly
used bank funds to buy cryptocurrency after being lured in with this scam.
According to Bloomberg, the bank almost completely tapped out its sources of cash — drawing $24
million dollars from lines of credit with a correspondent bank to fund improper wire
transfers. According to a regulatory review, the bank drew $21 million dollars from the Federal
Home Loan Bank System, shortly before collapsing. The Justice Department charged Heartland’s former
CEO, Shan Hanes in February this year, with embezzling $47.1 million dollars from the company.
The sudden collapse of Heartland Tri-State Bank is reported to have shocked the Elkhart
community in Kansas that Heartland served, adding to a string of regional-bank failures
last summer that culminated in a hit to the FDIC insurance fund that is
estimated to have cost $54 million dollars. I’ll put a link in the description to a BBC
documentary from last year that can be found on YouTube that documents some of the terrible abuse
suffered from the trafiqued individuals forced to work in these scam call centers. Their stories
are not for the faint of heart and describing them here would likely upset some viewers and
possibly get me demoneytissed on You Tube. Leaked Chinese-language scammer handbooks
which can be found online underscore how the scammers toy with human psychology to
take advantage of their victims, which the guidebook refers to as “customers”. There is
however no mention of the customer ‘always being right’ in the guidebook. I checked…
The guidebook says that your profile should have a naughty but cute nickname,
nothing crude. Your profile should be young enough to be attractive, but old enough to
avoid being seen as childish. You should seem educated; wealthy and you shouldn’t appear to have
a regular job. Male scammers can claim to have autism or an old psychological trauma from their
youth and the female customer's natural maternal love will instinctively come out when they hear
this and they won’t pressure you. Female scammers don’t need any of that backstory… They just have
to use a somewhat attractive profile photo… The manual teaches the scammers to arouse
the customer’s inner dreams, goals and to bring out a fighting state of mind.
You can tell stories about how you teach a friend or relative how to make money,
and that friend then cooks you meals in return. It suggests tricks like sending the customer two
pictures of luxury bags or watches asking them to help you choose one,
hinting that you have recently made a lot of money and want to buy a gift for a family member.
It says that you should initially ease “customers” into making crypto investments
by playfully bringing it up as a game you can play together. “Tell the customer you’re bored,
that you want to play a game with them that can make them some extra money.”
There are uglier versions of these romance scams too, where criminals using online dating sites
request intimate photos from their victims and then use them for blackmail. Of course,
the demands for money in a situation like that will never end. This version of the scam often
targets teenage boys and has led to some really terrible outcomes. In a situation
like this you just have to let them release the photos and then tell your friends and
family that they are deepfakes created using AI and just move on… Possibly the most useful
thing we may get from AI is a plausible excuse… A paper from John Griffin and Kevin Mei from
The University of Texas at Austin published a few months ago tracked crypto money flows
in order to uncover how these scammers operate. The authors used data from victim reports to find
the cryptocurrency addresses where victims were directed to send their funds by the scammers.
They started with 4728 crypto addresses and found that most of the addresses were used ten or more
times by the scammers. Twenty eight percent of the addresses were used more than one hundred times,
so they are not that worried about these things being shut down quickly.
The authors tracked $15.2 billion dollars being moved from five exchanges, including Coinbase,
Crypto.com and Binance - exchanges typically used by victims in Western countries. The study said
that once the scammers collected funds, they most often converted the various tokens into Tether,
a popular stablecoin known as USDT through Tokenlon. Then, after circulating it through
various hops in the network, the crypto finally exits the system through centralized
exchange deposit addresses. Transactions in amounts above $100,000 dollars and in
particular $1 million dollars commonly went to deposit addresses on Binance, Huobi, and OKX.
The researchers broke the transactions down into two groups, small transfers and large transfers,
figuring that the small transfers back to exchanges were most likely inducement payments,
used to build the trust of the victims and because scammers were unlikely to return large
sums of stolen funds to their victims, they considered deposit addresses that
receive more than $100,000 as more likely to be the scammers own deposit addresses.
These suspiciously large transactions were rarely sent to Western exchanges,
instead going to Binance, Huobi, OKX, Kucoin, Bitkub, and MXC. They say that the common
feature of these exchanges is that they have loose KYC procedures and are perceived to be
outside of the reach of US law enforcement. The study discovered by tracing the funds that
after the Chinese government banned cryptocurrency in late 2021, there was a dramatic decrease in
Chinese victims and a shift to US based victims. Overall, in the set of addresses touched by the
criminals, they found that 84% of the volume or $1.2 trillion dollars went through Tether.
The professors point out that it would be impossible to move that much illicit money
through the traditional financial system as the criminals would have to deal with
banks who follow anti money laundering and know-your-customer procedures. You
couldn’t move that much money using cash either. Money flows – they point out are the lifeblood of
organized crime, financing both current and future criminal activity. If these flows move unimpeded,
then criminal networks can be expected to expand over time. This is why the international financial
system has a framework in place to block the financing of international criminal activity.
The paper argues that with the emergence of cryptocurrencies which were specifically
designed to create an anonymous alternative financial system, criminal networks now have
new ways of avoiding the detection and seizure of criminal proceeds. The professors highlight
that crypto is rarely used as a medium of exchange to purchase goods and services, and
thus typically needs to be converted into usable money. The entry and exit points into the crypto
ecosystem are – according to their research - typically crypto exchanges, which also purport to
conform to international laws designed to mitigate illicit financial flows. They point out that while
crypto transactions are quasi-anonymous, they are still recorded on publicly accessible blockchains
and with substantial effort, the movement of funds and their exit points can be tracked.
The YouTube channel Coffeezilla has repeatedly shown this to be true by successfully
tracking cryptocurrency transfers from the stupidest types of scammers – Influencers…
So far – unfortunately - regulators and law enforcement appear to be either unwilling
or unable to do anything about this type of crime other than recording it and discussing if various
cryptocurrencies should be considered commodities or securities, a somewhat pointless distinction.
In Number Go Up, a book I will link to in the video description, Zeke Faux describes visiting
a scam compound in Cambodia alleged to house six thousand captive workers. He describes seeing
people walking out of a money exchange booth that displayed the Tether logo carrying a lunchbox-size
brick of $100 bills wrapped up with rubber bands. The University of Texas professors put forth a
number of practical implications that can be drawn from their study. They firstly highlight
which crypto exchanges are operating as the off ramp for scammers. They show how useful Tether
is to these criminals due to its stability and opacity, and they show how decentralized exchanges
help block the tracking of illegal fund flows. The professors argue that the (often European
and American) crypto hedge funds that provide liquidity on these platforms are profiting by
facilitating money laundering. They point out that the consistent patterns that their study
uncovered point to a large, coordinated network, or several networks which share similar services,
meaning that these scams should not necessarily be treated as individual crimes,
which is at present the norm for law enforcement. They finally argue that western crypto exchanges
who provide entry points for victims into the scam network are not adequately monitoring and
protecting their customers, which they are capable of doing in the way that credit card companies are
able to flag suspicious credit card transactions. Their findings suggest that criminal networks are
moving substantial funds cheaply and without much fear of detection and that the methods
used for this study could be applied by law enforcement to track these criminal networks.
If you found today’s video interesting, you should watch my interview with Zeke Faux on
his book Number Go Up next. Don’t forget to check out our sponsor DeleteMe using
the link in the description. Have a great day and see you in the next video, bye.
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